Benefits of an SBA 504 Loan
There are several reasons why SBA 504 loans are a go-to for small business owners, including the following:
- Prolonged amortization periods: The Small Business Administration (SBA) 504 loans have an amortization period of up to 25 years, depending on the assets being financed. Thus, they permit you to spread your payments over a more extended period, reducing the amount paid monthly.
- Fixed-rate interests: In an SBA 504 loan, the interest rate is set when the loan funds and is generally tied to ten-year US Treasury rates. However, the loan will have a fixed rate, typically below the current market.
- Fully Amortizing: SBA 504 loans do not have balloon payments; therefore, you will pay without worrying about making huge payments at maturity or needing to refinance.
- Low down payment: SBA 504 loans provide a low down payment of 10% of the total project. Therefore, you can conserve your business’s cash flow and invest in other business areas.
- Cash savings: SBA 504 loans can help you increase the cash flow of your business by providing you with low, fixed-rate financing. Additionally, with these types of loans, most of the fees are eligible to be financed into the project. Thus, the total amount needed to close will be much less than a conventional loan.
Depreciation Expense
Like any other asset, a commercial property wears down over time. Therefore, you can deduct a certain amount from your income taxes. Right now, commercial buildings are depreciated for over 39 years. So, buying a commercial establishment for $5 million can create approximately $128,000 of depreciation.
This deduction typically reduces your taxable income, leading to potential savings based on your tax rate.
Interest Expense Tax Deductions
You can deduct interest on your mortgage and commercial mortgage payments. As a result, lowering your taxable income and reducing your overall tax liability is easy. For example, if you’re paying $10,000 monthly with $2,000 interest, you can take a mortgage interest tax deduction of around $24,000.
Qualified Business Income Deductions (QBI)
Section 199A of the 2017 Tax Reform Act permits pass-through income earners, including individuals, trusts, and estates, to deduct up to 20% of their eligible business income from their taxable income.
However, limitations for QBI include the greater 50% of W-2 wages paid for 25% of W-2 wages paid and 2.5% of the property.
Non-Mortgage Expenses
Maintenance, repairs, and upgrades are tax benefits of buying a building for your business. While they are out-of-pocket expenses, these expenses improve your building’s value. In addition, condo fees associated with purchasing a building will be deducted if you use the property for your work.
Capital Gains
The Opportunity Zones are designated low-income communities that provide tax incentives to stimulate economic and investment development. The Opportunity Zones Program allows individuals to defer eligible capital gains until December 2026 as long as they invest in an Opportunity Fund.
So, purchasing a building for your business in the Opportunity Zones makes you eligible for tax benefits. If you hold the property for at least five years, you may take advantage of a 10% reduction in capital gains. In addition, if you own the property for at least seven years, you’re eligible for a 5% reduction in your capital gains.
Reduce Tax Burdens for Beneficiaries
Commercial properties usually have tax benefits for both the owners and their heirs. Therefore, if your beneficiaries decide to sell your property, they’ll pay tax on the increased value from when you died. For example, suppose you bought the property at $4 million, and its value increased to $6.5 million at the time of death. Then, if your beneficiaries decide to sell, they’ll only need to pay taxes on the $2.5 million the property appreciates.
Contact a Loan Expert Today
As a small business owner, buying a building for your business can bring many tax benefits, improving your finances in the long run. With the SBA 504 loan program, you can access affordable financing to make your property purchase a reality.
